New Jersey

On Monday, attorneys general in eleven states, including New York, New Jersey, Massachusetts, California, and Illinois, revealed that they are investigating several prominent fast food franchisors for their potential use of no-poaching or non-compete agreements restricting the ability of low wage workers to obtain a better-paying job with another franchise. To that end, these attorneys general have propounded document and information requests to these restaurants, returnable August 6, 2018.

In the Illinois AG’s press release, Attorney General Madigan stated that “No-poach agreements trap workers in low-wage jobs and limit their ability to seek promotion into higher-paying positions within the same chain of restaurants.” Madigan claims that at least 58 percent of major franchisors have no-poach provisions in their franchise agreements. This is not the first time that the Illinois AG has taken aim at non-compete agreements. Over two years ago, Madigan’s office sued sandwich chain Jimmy John’s for employing what it deemed “highly restrictive non-compete agreements,” ultimately reaching a $100,000 settlement with the franchisor. Ten months after Illinois passed the Freedom to Work Act, which prohibits private sector employers from requiring non-compete covenants of low-wage employees, defined as the greater of the applicable federal, state, or local minimum wage (currently $7.25 under federal law and $8.25 under Illinois state law) or $13 per hour, Madigan sued a national payday lender for requiring its employees, including workers who earn less than $13 an hour, to sign a non-compete agreement as a condition of employment.

Illinois is not the only state to pursue non-compete reform. Several other states recently have enacted legislation curbing the use of non-competes with respect to certain categories of workers, such as certified nurse practitioners and midwives (New Mexico) and workers in the broadcasting industry earning under a certain salary (Utah). Other states have proposed similar legislation. For example, New Hampshire bill SB 423 would ban non-compete agreements with “low-wage employees.” On the other end of the spectrum, Vermont House Bill 556 and Pennsylvania House Bill 1938 would ban all non-competes other than those formed in connection with the sale of an ownership interest in a business entity or the dissolution of a partnership or limited liability company. Even if these bills ultimately fail, they signal a rising trend of state-level restrictive covenant reform, which will likely gain momentum as state attorneys general step up enforcement in this area.

The New Jersey Senate wants no more secrecy around harassment claims. On a 34-to-1 vote, the chamber approved legislation banning

involving sexual harassment claims. The bill is still pending in the House, where a vote is expected in the next few weeks. The legislation would also allow victims to keep their identities confidential and would establish jurisdiction in Superior Court, arguably bypassing arbitration agreements.

On May 10, 2018, the New Jersey Assembly Labor Committee advanced Assembly Bill A1769, a bill that seeks to provide stricter requirements for the enforcement of restrictive covenants.

If enacted, the legislation would permit employers to enter into non-competes with employees as a condition of employment or within a severance agreement, but such non-competes would only be enforceable if they meet all of the requirements set forth in the legislation. Thus, if enacted, employers will have to comply with the following requirements in order for a New Jersey non-competition agreement to be enforceable:

If the non-compete is entered into in connection with commencement of employment, the employer must disclose the terms in writing to the prospective employee by the earlier of a formal offer of employment, or 30 business days before the commencement of the employee’s employment;

If the non-compete is entered into after commencement of employment, the employer must provide the agreement to the employee at least 30 business days before the agreement is to be effective;

The non-compete agreement must be signed by both the employer and the employee and expressly state that the employee has a right to consult with counsel;

The non-compete shall not be broader than necessary to protect the legitimate business interests of the employer, including the employer’s trade secrets or other confidential information, such as sales information, business plans, and customer or pricing information;

The time period of the non-compete must not exceed 1 year following the date of termination of employment;

The non-compete must be reasonable in geographic scope, meaning that it must be limited to the geographic area in which the employee provided services or had a material presence during the two years preceding the date of termination, and the non-compete may not restrict the employee from seeking employment in other states;

The non-compete shall be reasonable in the scope of the proscribed activities and limited to only the specific types of services provided by the employee at any time during the employee’s last two years of employment;

The agreement must state that the employee will not be penalized for challenging the enforceability of the non-compete;

The agreement should not contain a choice of law provision that would have the effect of avoiding the requirements of the legislation;

The agreement shall not waive the employee’s substantive, procedural, or remedial rights provided under the legislation or any other law, or under the common law;

The non-compete shall not restrict the employee from providing a service to a customer of the employer if the employee does not initiate or solicit the customer; and

The agreement shall not be unduly burdensome on the employee, injurious to the public, or inconsistent with public policy.

The bill broadly defines “[r]estrictive covenant” as any agreement between an employer and an employee under which the employee “agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” It is unclear whether the bill intends to apply only to traditional non-compete agreements or whether it is also intended to apply to other forms of restrictive covenants, such as non-solicit and/or anti-raiding provisions. It appears, however, that the bill is intended to apply only to non-competes as the proposed legislation contains a provision stating that a restrictive covenant may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative agreement, such as “an agreement not to solicit or hire employees of the employer; an agreement not to solicit or transact business with customers, clients, referral sources, or vendors of the employer; or a nondisclosure or confidentiality agreement.”

Moreover, the bill provides that any non-compete shall be unenforceable against all non-exempt employees, as well as other types of short-term or low-wage employees.

An employer who seeks to enforce the non-compete would be required to notify the employee in writing within 10 days after the termination of the employment relationship of the employer’s intent to enforce the non-compete. Failure to provide such notice shall void the agreement; however, notice need not be given in the event the employee was terminated due to misconduct.

Unless the employee was terminated for misconduct, the bill would also require employers who enforce a non-compete to pay the employee during the restricted period 100 percent of the pay that the employee would have been entitled and make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled.

If enacted, the legislation would allow employees to bring a cause of action against any employer or person alleged to have violated the act. In addition to injunctive relief, employees would be permitted to recover liquidated damages, compensatory damages, and reasonable attorneys’ fees and costs.

As with many other New Jersey employment laws, the bill would require employers to post a copy of the act or summary in a prominent place in the work area.

While the act would go into effect immediately upon enactment, it would not apply to any agreement in effect on or before the date of enactment.

If enacted, Assembly Bill A1769 would severely curb the use of non-competes in New Jersey. Employers should be aware of the multitude of requirements they would have to establish in order to enforce a non-compete, including the requirement to pay employees 100 percent of their salary during the time the non-compete is in effect. Thus, in the event the bill is signed into law, employers should now begin to consider implementing other types of agreements aimed at protecting their legitimate business interests, such as confidentiality agreements and non-solicit agreements in lieu of non-competition agreements.

When an employee trusted with access to trade secret information leaves to join a competitor, many former employers have concerns. Merely warning a former employee and his/her new employer not to make use of the former employer’s “trade secrets and confidential information” may be insufficient to hold the new employer accountable for such employee’s transgressions, at least according to one New Jersey federal district court. As that court said in Givaudan Fragrances Corporation v. Krivda, decided October 25, 2013, “The onus is on the former employer to come forward and put the current employer on specific notice of trade secret protection, or else lose that protection. This burden includes immediately describing the alleged trade secret with precision so as to inform the defendant exactly what the plaintiff is alleging to have been misappropriated.” The court went on to grant partial summary judgment to defendant limiting plaintiffs to 34 of the 616 formulas of concern to the plaintiff because plaintiff had failed to fulfill its obligation to put defendant on notice of what trade secrets plaintiff contended were at issue by advising defendant specifically of the details of 582 of the formulas at issue. This is a duty that a plaintiff must fulfill by specific “disclosure at the outset of the litigation, if not before.”

Read literally, such a rule would create a real conundrum for trade secret owners. According to the court, plaintiff should have “disclosed the specification of each formula,” because “then appropriate discovery procedures could have precisely identified whether [defendant] had received any or all of the allegedly purloined formulas.” While that is true, and makes perhaps a certain amount of sense within any litigation, the court also suggested that such specificity may be required pre-litigation. But, informing a competitor pre-litigation and without the benefit of a protective order of, as the court noted, “exactly what the plaintiff is alleging to have been misappropriated” could itself amount to disclosure that ends the secrecy attendant to the protected information. Yet, relying on more general descriptions would seem insufficient to provide the sort of notice that the court in Givauden seemed to require. While the court in Givauden was dealing with a situation in which plaintiff’s discovery responses defining its trade secrets had remained throughout the litigation a bit too circumspect, the court’s language expressly goes beyond the litigation context to pre-litigation notice issues. In fact, the Givauden court, citing Fox v. Millman, 210 N.J. 401, 425-27 (2012), stated that “The law does not ‘impose on [subsequent employers] like Mane an affirmative duty to undertake an inquiry, independent of the information given to them by [the employee] as to the source’ of the employee’s work product. An employer is permitted to rely on the representations of the employee that no breach occurred without any further duty of inquiry. The employee’s contractual or fiduciary ‘duty to safeguard confidential information’ is not imputed to subsequent employers.” Because the Givauden court saw the law this way, it concluded that a subsequent employer’s duty would only arise upon being given sufficiently detailed information to require inquiry.

Despite Givauden, trade secret owners should be slow to provide a former employee’s new employer thedetailed specifics of the trade secrets of concern. Unilateral disclosure at the outset aimed at ameliorating suspected previous unauthorized disclosures seems ill-considered. Reading between the lines of Givauden, it seems that the court tired of plaintiff’s years-long, unvaried approach of lack of specificity. The lesson of Givauden is not, therefore, to disclose too early, but to avoid disclosing too late. Failing to disclose during the course of discovery, with a protective order in place, just smells funny to the court and leaves a bad taste in its mouth.

The New Jersey Legislature was overwhelmingly in favor of a measure that would have barred employers from obtaining social media IDs and other social media related information from employees and applicants. Click here for A2878 as passed. But Governor Chris Christie vetoed A-2878 because it would frustrate a business’s ability “to safeguard its business assets and proprietary information” and potentially conflict with regulatory requirements on businesses in regulated industries such as finance and healthcare. Click here for the Governor’s Veto Statement. While the Governor thought the bill well-intentioned, he conditionally vetoed it for painting “with too broad a brush,” citing the trade secrets/proprietary information concern as a primary motivation: “In view of the over-breadth of this well-intentioned bill, I return it with my recommendations that it be more properly balanced between protecting the privacy of employees and job candidates, while ensuring that employers may appropriately screen job candidates, manage their personnel, and protect their business assets and proprietary information.”

The Governor specifically recommended the bill be revised to:

Create an exception to allow investigation of work place misconduct or unauthorized transfer of confidential or proprietary data to a personal account;

Add language confirming that an employer may view, access, or utilize information about a current or prospective employee that can be obtained in the public domain;

Carve out of the definition of “personal account” any account, service or profile created, maintained, used or accessed by a current or prospective employee for business purposes of the employer or to engage in business related communications;

Eliminate provisions that would create a civil cause of action for affected employees or applicants;

Add a proviso stating that nothing in the act shall prevent an employer from implementing and enforcing a policy pertaining to the use of an employer issued electronic communications device or any accounts or services provided by the employer or that the employee uses for business purposes; and

Add a proviso stating that nothing in the act should be construed to prevent an employer from complying with the requirements of State or federal statutes, rules or regulations, case law or rules of self-regulatory organizations.

Click here for the bill as revised after the Governor’s veto statement.

These last two provisos are important ones, especially for the financial services industry and the healthcare industry. They are important because FINRA, for example, has laid out certain monitoring and record keeping requirements concerning social media used to communicate with clients and prospective clients concerning potential financial transactions. See, e.g., FINRA Guidance here.

There are likewise data security requirements emerging out of HIPAA and other bodies of law that may require security and monitoring of social media. Click here for a discussion of such issues by Dan Goldman (@danielg280), legal counsel at Mayo Clinic and Advisory Board member to the Mayo Clinic Center for Social Media. In an age of BYOD (Bring Your Own Device) and the consolidation of business and personal activity to a single mobile device, failure to include such exceptions would force employers into hard choices between required monitoring and desired seamlessness of the business/personal transition.

While many states have in the last year adopted such statutes, the interplay between the Governor and the Legislature in New Jersey plays out the competing interests nicely, and hopefully starts a trend toward a more measured approach to such questions. Accommodating these competing interests is not only a legislative challenge, but is one faced by employers and businesses every day.

Earlier this month, the New Jersey Assembly introduced a new bill (Assembly Bill No. 3970) that proposes to invalidate non-competition, non-solicitation and confidentiality covenants of individuals who qualify for unemployment compensation. The bill does not seek to nullify covenants already in effect, merely those entered into after the date of the bill’s enactment. By permitting individuals subject to restrictive covenants to seek employment, the bill aims to reduce the State’s unemployment benefits expenditures.

Presently, New Jersey courts approve of restrictive covenants in employment contracts if they are reasonable. To be reasonable, they must protect the employer’s legitimate interest, must not cause undue hardship for the former employee, and cannot be against the public interest. If passed, the bill would significantly limit employers’ ability to bind their employees to such restrictive covenants and potentially leave them without means to protect valuable confidential information and customer contacts.

With the introduction of the bill, New Jersey follows in the footsteps of Maryland, which proposed legislation on January 9 to bar non-compete covenants of those individuals who receive unemployment insurance benefits. Like the Maryland bill, the New Jersey bill has been referred to committee.

On Monday, January 9, 2012, Governor Chris Christie signed into the law the New Jersey Trade Secrets Act (NJTSA, http://www.njleg.state.nj.us/2010/Bills/S2500/2456_R1.HTM), the Garden State’s version of the Uniform Trade Secrets Act (UTSA). New Jersey, thus, becomes the forty-seventh state to adopt some form of UTSA. While the New Jersey Act will promote some level of uniformity in the approach to trade secrets issues, New Jersey specific changes to the uniform act promise that this statute will build upon, rather than depart from, New Jersey’s common law tradition of protection of trade secrets and other valuable business information.

Some New Jersey specific points in the legislation:

• The definition of “trade secret” under NJTSA is broader than under UTSA, as NJTSA incorporates the broader protections of New Jersey common law principles;

• NJTSA supplements, rather than displaces, New Jersey common law, as the statute states that the rights, remedies, and prohibitions under NJTSA “are in addition to and cumulative of any other rights, remedies, or prohibitions provided under common law or statutory law of this State”;

• NJTSA prohibits acquisitions of the trade secrets of another by “improper means,” and contains definitions of that term and “proper means” not found in UTSA;

• NJTSA makes mere or threatened acquisition by improper means of another’s trade secret actionable, and enjoinable, even if there is no concomitant likelihood of disclosure to or use by third party.

These NJTSA-specific provisions combine with UTSA’s allowing for recovery of attorneys’ fees and punitive damages to provide the holders of trade secrets a powerful new tool in New Jersey. Those who helped frame, over a multi-year time period, the bill as adopted in New Jersey included its sponsors, employer groups, and the New Jersey Law Revision Commission and its legal advisors, including the author of this post.